Recession, International Trade and the Fallacies of Composition

A truly global recession has not been manifest since the Great Depression of the 1930s. As a result, the multilateral institutions put in place at the end of the Second World War to ensure that a major depression never happened again have not been tested. One of the lessons of the Great Depression was that governments had a major role to play in managing the economy. The use of subsidies to affect economic outcomes was one manifestation of this expanded role. In a recession, sector specific subsidies will likely be requested by firms. Subsidies can distort trade, leading to the potential for beggar thy neighbour subsidy wars. Subsidies will be difficult to discipline in a global recession.